Good wine is the perfect asset in times of volatility

Message in a bottle: While luxury goods and markets are often dominated by fashion, good wine seems to have a much wider appeal






Interview with: Andrea Elia, Managing Director, UKV International


July 15, 2020

With COVID-19 plunging markets around the world into a state of flux, investors are looking for alternatives to enter. One of the best performing assets is good wine, which offers stability and decent returns year over year.

The upper end of the fine wine market is self-contained and to a large extent separate from financial markets, as it follows the movement of wealth around the world rather than being permanently tied to a single economy. This unique characteristic means that it is less susceptible to fluctuations seen in conventional markets and, more importantly, provides flexibility, as its appeal is less open to fashionable interpretation than other luxury collectibles.

Global Finance spoke about upcoming developments in the fine wine market with Andrea Elia, Managing Director of Swiss fine wine company UKV International, which buys, sells and trades some of the most sought-after wines on the planet.

Why do you think the fine wine market is attracting such interest?
Harvesting good wine to market in the future is not a new concept. It has, however, become one of the most popular commodity markets, enjoying a perpetual increase in investment over the past 25 to 30 years, as it benefits from an extremely stable environment, flexibility and favorable tax treatment from regulators.

Historically, the fine wine market has outperformed many other investments and is considered a safe haven for funds

The wine market originated when aristocrats and nobility bought more than they intended to drink, before selling to subsidize their own consumption. Good wine was also frequently used as an alternative currency and was exchanged for other goods, used to pay debts, or offered as collateral against financial borrowings. Today it is used more as a safe place to park money in the medium term, earning a decent return on the capital element.

Why does good wine have such international appeal, especially among savvy investors and the wealthy?
After the 2008 financial crisis, people looked for areas to protect funds that were not directly linked to financial markets and therefore free from the exposure that traditional investors are often forced to endure. Investors have been drawn to assets that are less volatile and more durable over time.

The tangible aspect of a good wine may be another reason why investors like this market; it is comparable to ownership without the maintenance or dependence on trends. Few tangible assets can be easily traded internationally, and even fewer are not dependent on a single economy.

In 2008, fine wines experienced a brief decline in value before rebounding to record highs. How does the market stay stable in turbulent financial times?
I think the wine sector remained resilient in 2008 because, while some financial markets were in crisis, others, like the Far East, were bullish. In this way, good wine is quite mercenary and unique as it follows the money, moving into active markets to maintain a strong presence.

Historically, the market has outperformed many other investments and is considered a safe haven for funds. In the first quarter of this year, the COVID-19 crisis sent stock markets plummeting. While the S&P Global Luxury Index fell 23%, the Liv-ex Fine Wine 1000 fell only 4% and had begun its recovery in May (see figure 1).

How does the market stay strong as political landscapes and financial horizons change?
The market maintains a strong position in the performance rankings as it always attracts new funds. While luxury goods and markets are often dominated by fashion, fine wine seems to have a much wider appeal. In many countries, it signifies success, much like an impressive property or an exotic supercar that can be displayed as a status symbol in social or business circles. By spreading success in this way, good wine takes on an additional dimension as an investment.

The simplicity of the market also adds appeal. Driven by the simple laws of supply and demand, the fine wine trade makes economic sense for investors – even those with no experience in this asset.

What drives demand in the market?
The market has attracted investment from high net worth individuals, which has increased demand on an already constrained supply chain. To appreciate it, you have to realize that some of the biggest châteaux in Bordeaux and Burgundy produce less than 2,000 cases a year. This demand is growing exponentially as the market attracts new areas of wealth, but with production remaining static, it’s easy to see how demand outstrips supply for the most sought-after wines.

Wine is considered an armchair investment that requires no maintenance and has minimal costs except for storage and insurance to protect the asset. It is important that wine is kept in a secure facility with automated atmospheric conditions suitable for long-term wine storage to ensure its maintenance.

Unlike many luxury consumables, there is a final stock at the end of each harvest year, as one cannot produce more than the capacity of the vineyard. Therefore, you cannot increase production to meet demand. Moreover, not all harvests produce the same quality of grapes. Extreme weather conditions will create a lower yield, forcing Chateaux to be more critical with their selection of grapes for the best labels. In some cases, this reduces production to only a third, which naturally affects the values ​​of the new vintage and subsequent vintages.

The fine wine market maintains a strong position in the performance rankings as it continues to attract new funds

Do you have any advice for someone who wants to get involved in good wine?
Our clients come from many walks of life, but they have one thing in common that they prefer to have funds outside of the more volatile traditional markets. They know it’s not a buy-sell market, which means they don’t have to monitor market performance regularly. Most customers value wine as a medium-term investment and know that if they achieve 7-14% growth per year in a tax-efficient environment and the wine is kept for 8-10 years, they will have a valuable collection of fine wines.

Anyone who wants to get involved in the fine wine market needs to understand this and look elsewhere if they are looking for massive overnight profits or quick returns. This market remains stable because it is a steady and incremental growth over months and years. My advice to anyone looking to enter the market would be to view it as an asset that they can add frequently. They must establish a solid foundation and then build on it.

How could an individual engage with the market before committing financially?
UKV International hosts lunches and social events, to which we invite potential and long-time clients so they can network, get first-hand examples of how the market works and hear feedback on the service we provide.

This allows potential clients to get a feel for the market, to take advantage of the social aspect of our services and to define their expectations in terms of timeframes, returns and exit strategies. Many people from various geographies and social backgrounds attend these events, which shows that the market is not the preserve of a particular demographic group.

Our customers have many reasons to enter the fine wine market. Many of them are successful entrepreneurs who simply want funds outside of traditional markets; they are corporate owners and directors who have used up all their personal tax allowances and traditional tax envelopes and want an additional tax-efficient vehicle. Additionally, many of our clients are looking to strengthen their pension or retirement plans.

Entry levels differ and can be flexible depending on the client’s circumstances and goals. Most clients enter the market with between $24,000 and $61,000 to create a foundation to build on. Some start with as little as $12,000 and add steadily to build a solid portfolio over 12-18 months.

Those looking for income from their investment typically move into more volatile or underperforming funds, and so their entry levels are much higher. In these cases, the entry levels are between $600,000 and $1.2 million, but it largely depends on the individual, the purpose of wine ownership, and what they are looking for. to be withdrawn from the market. Whatever they are looking for, the message in the bottle is this: good wine is not just for drinking.

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